This isn't the way eBay's (NASDAQ:EBAY) reign ends in China, folks.
Earlier this month, when Yahoo! (NASDAQ:YHOO) announced that it was making a $1 billion investment to obtain a 40% stake in Chinese auctioneer Alibaba.com, even some of the most ardent eBay bulls probably got nervous. It wasn't so long ago that Yahoo! had hooked up with Softbank to squash eBay in Japan.
It's not going to play out quite that way this time.
For starters, what is Yahoo! Auctions stateside? I can tell you what Yahoo! Auctions is not. There are not a countless number of e-books out there to educate a consumer on how to get rich by selling on Yahoo! Auctions. There isn't a "Yahoo! Auctions Live" conference in California every summer. There aren't growing chains of consignment shops that thrive on moving product through Yahoo! Auctions.
No. That's all eBay. Like every other virtual marketplace wannabe, Yahoo! has never posed much of a threat to eBay in the United States. Yahoo! was in the perfect position to become a legitimate threat. It's a popular online destination. It keeps a massive mailing list thanks to its lively email service. It keeps merchants close through e-commerce solutions. Those inherent advantages didn't help. Yahoo! tried to win over the public on price, but that didn't work either. That's why, two months ago, Yahoo! decided to make its auction site completely free.
With that move, I can offer you the chance to take a virtual trip through Yahoo! Auctions and come to the literal and logical cobweb-ridden conclusion that Yahoo! Auctions can't even give itself away.
Chinese checkers
The perceived danger to eBay in China isn't coming so much from Yahoo! as it is from Alibaba. More specifically, it is Alibaba's TaoBao.com consumer-to-consumer auction site that has some observers worried.
As a free site, TaoBao suffers from many of the same shortcomings that Yahoo! Auctions does domestically. Because it costs nothing to list an item, it's a haven for spam and unrealistic starting bid prices, just as eBay's own American site becomes a clutter of noise when it rolls out the occasional free-listing day. That just proves that the quality of traffic is just as important as the quantity.
True, eBay became the gold standard because of volume. Bidders came because it's where the sellers were, and sellers came because it's where bidders were. However, the secret ingredient in that recipe was that because of the escalating listing fees, every bidder had a vested interest in pricing the auction with the intent to sell.
This is not to say that TaoBao is a sham. In fact, if its claims are accurate -- and the company was able to connect consumer transactions that totaled $200 million this past quarter -- TaoBao is doing just fine.
Earlier this year, TaoBao's grasp on the market was at 41% to eBay's 53%. They are both strong. History dictates that just one consumer auction site will reign supreme in any given country, but history can be a schmuck sometimes. China's Internet boom is in its infancy, with 1.2 billion of the country's 1.3 billion residents still not connected. Why can't there be two dominant players in a country that is many times larger than most nations?
Big in Japan
One of the grandest misconceptions out there is that eBay failed in Japan. A more accurate description would be that eBay never had a chance to get started. Yahoo! had teamed up with Softbank in 1999 to launch its auction site well before eBay had even stepped foot on the rich country's soil. When eBay gingerly tried to enter the market, it got nothing but jet lag. It was toast.
That's not the case in China. TaoBao wasn't even around when eBay had acquired its first stake in EachNet three years ago and swallowed it whole in 2003. This isn't eBay's battle to win. It's eBay's battle to lose.
If TaoBao succeeds, it won't be because it toppled eBay. It will be because it found a way to coexist. The pressure now rests on TaoBao and the strategy it takes in the future. The company has mentioned that it may start charging for auctions as early as next year, but I'm not entirely convinced that it will happen.
It's too risky. If the company's auction volume plummets once it starts charging its sellers, TaoBao may never recover. Site changes and a poorly received escrow service have caused eBay to stumble in China in the past. It has recovered. TaoBao won't be as fortunate. If it fails to deliver a workable platform as a pay site next year, the retreat will be more than just humiliating. It will be exposed as a flawed model. Investors will lose interest, and auctioneers may just follow suit. That's why I see TaoBao holding its ground as a free site and using its presence as a way to grow its Alipay clone of PayPal as well as earning its keep through advertising.
China is too important a market to lose for the sake of attempted one-upmanship.
The 1-ton coup behind the Meg Drop soup
Just look at some of the key players beyond the auction space. China's leader in online gaming is Shanda Interactive (NASDAQ:SNDA). Its Internet games are wildly popular, with as many as 2.5 million Chinese gamers playing at any one time. You have NetEase (NASDAQ:NTES) right behind Shanda. Both companies are growing earnings on fat double-digit profit margins. You have Sina (NASDAQ:SINA) in the portal space and Baidu.com (NASDAQ:BIDU) as the search engine of choice. These are all amazing companies, pumping out some jaw-dropping income statements. And the beauty here is that we're talking about a region where the per capita annual income is a mere $1.200. Just 8% of the residents are Web-enabled. What will happen as the country's economy improves to the point where disposable income grows along with Internet usage?
That's why our Motley Fool Rule Breakers newsletter service, a premium research product that specializes in ultimate growth stocks, has already singled out Shanda and NetEase as recommendations. One is up by better than 50% since we picked it nine months ago.
China's potential is huge. It's why eBay can't afford to lose. And it's why TaoBao can't afford to try to see if it can win. They will remain two visible enemies, talking a big game in public but -- privately -- laughing their way to the bank.
Sina and eBay are Motley Fool Stock Advisor recommendations.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user -- with 149 positive-feedback recs to show for it. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
